Here is how it worked:

Bain Capital decides to acquire Toys-R-Us so they set-up NewToyCo and invest $5B in it.

NewToyCo buys Toys-R-Us with that $5B and installs new managers at Toys-R-Us. Since the invested cash was investment and not a loan, NewToyCo owns Toys-R-Us free and clear

The new managers of Toys-R-Us get a $5B loan from banks secured by the assets of Toys-R-Us and pay a one time $5B dividend to shareholders of NewToyCo.

If everything goes well and Toys-R-Us can service the loan, Bain owns Toys-R-Us for free and sells it or takes it public. If things don't work out, they collected huge management consulting fees for s few years. Bain ran this exact same play on KB Toys with the same (bankruptcy) result.

So it's basically the opposite of going public?

You use that $5B to pay all the original owners (shareholders), and now have debt instead.

This is bizarre. I did not know that leveraged buyouts could work like this.

It's just like a mortgage. Even though it's you buying the house, it's in a way the house that ends up owning the mortgage (in many jurisdictions, you can walk away from the house and mortgage, and the bank had no leverage against your person, they can only repossess the house).

I was trying to explain what a leveraged buyout was and why a company like Toys R Us had so much debt on its books. After trying to talk through it, I used the mortgage analogy and it made a lot more sense.

No, there the house is collateral.

In this case, instead of the lender simply taking over the acquired company, the acquired company declares bankruptcy and is liquidated.

But a bank will just hand over money for an LBO without taking collateral?

(FYI this isn't the case in at least the UK...)

What's the difference in practice?

There is no* risk for the acquiring company.

*Obvious simplification is obvious. The risk is they can't keep acquirred company alive long enough to extract a profit before the husk of a company finally implodes.

Unless the acquired company is obviously healthy enough to service the debt through to maturity, or the bank is really stupid, the acquiring company has to put up non-trivial collateral.

Or put another way, if the acquiring company has no risk, then the bank putting up the leverage has it. The risk doesn't just disappear.

There was very little risk for the acquiring company or banks who loaned the money. Bain partnered with the real estate company Vornado Realty Trust in the Toys-R-Us deal. The bank loans were secured by Toys-R-Us assets that will be auctioned off, and Vornado will re-develop the land that Toys-R-Us stores sit on - everybody wins. Except for the 30,000 Toys-R-Us employees of course.

If you can buy a company with the sum of money you can raise by mortgaging the real estate it occupies, the implication is that the company is worth less than this real estate. Considering the kind of real estate Toys-R-Us shops occupied, this is not a good look for them, nor does it speak well for the employees' prospects had the LBO not happened.

The US used to have these businesses called drive-in movies. You could pack your car full of friends and snacks, then pick a spot in a grass field where you had a picnic while watching a movie. The value of the real-estate these businesses sat on far exceeded the return of operating the drive-in, so drive-ins no longer exists within an hour drive of most people. The US is poorer for no longer having these staples of 1950's and 1960's culture.

Similarly, Toys-r-Us was part of the US culture and has been destroyed for a few million in profit because it made economic sense. Hardware stores and book stores will also disappear from our culture, is this the society we want? People band together to support opera and symphonies, I would rather save drive-ins and hardware stores since they are more important in almost everyone's lives.

That's a rose-tinted view of things. There's plenty of dirt-cheap land just outside all but the biggest American towns, but no drive-ins on them. Seriously, without knowing you, chances are you and a couple of friends could pool your savings and buy a plot and setup a drive-in theatre. But chances are you'd fail. Land increasing in value is far from the only thing that changed that affected drive-ins. A car (and especially the sound options in one) is far from an ideal place to enjoy a movie from, streaming (or before that, renting a video or just watching on broadcast TV) on a large colour TV is much, much better. Modern, multiplex theatres provide a technically far, far superior experience to either. Attitudes to pre-marital sex have decreased the value of having somewhere to legitimately park in the dark for an extended period.

Many analogous things are true for toy stores and hardware stores etc. And people are banding together to support things that aren't commercially viable, the closest thing to hardware stores in this regard is probably hacker spaces.

And to answer your question directly, yes, I strongly prefer to live in a society where businesses are allowed to fail when they've run their course rather than being kept on life-support for vague past-romantic reasons.

You are probably right about drive-ins, and if I like them so much I should create a non-profit, co-op one.

I completely agree non-viable businesses should fail just like we let insolvent banks and automakers...well those were an exception.

It comes down to what our core beliefs are as a society. If we want to maximize private profit, why aren't there slot machines and cigarette vending machines at every bus stop? Toys-R-Us was a viable business that was destroyed for a relatively small profit - should that behavior be: illegal, discouraged by taxes, or encouraged with government backed loans? Those are the kinds of questions we could be asking. Our current regulatory environment is not the same as what it was in the past or what it will be in the future.

If the value of the real-estate was higher, why is it sitting unused?

https://edition.cnn.com/travel/article/abandoned-drive-in-mo...

> The US is poorer for no longer having these staples of 1950's and 1960's culture.

Veering a bit off topic, but they're coming back in some locales. Multiple have opened in my area.

But is there risk when using the company as collateral? Isn't that the point of collateral? Or do they still have to put up the difference between the current value of the company and the debt?